Bank of America (NYSE: BAC) Has Just Been Upgraded

We’ll know a lot more in about two week’s time when they report fresh earnings, but for now it’s safe to say that Bank of America (NYSE: BAC) is still one of the biggest and best of the financial stocks. They recovered quicker than most of their peers from the COVID pandemic and have remained more buoyant than most of them in recent weeks too. It’s been a scary first quarter for banks in general, with the Russian invasion of Ukraine popping up as a headwind few saw coming. Bank of America stock had managed to reach fresh all time highs at the start of February before quickly retracing and falling back to the same price they were at this time last year as the invasion wore on investor sentiment. 

But there are signs afoot that this is going to end up being a solid buying opportunity. Let’s take a look at some of the reasons why. 

On Monday of this week, the team over at Morgan Stanley upgraded Bank of America stock from Underweight to Equal-Weight. While not as good as the coveted Overweight rating, equivalent to the more appropriately termed Buy rating that you get from other banks, it was a good sign. Especially in light of the fact that their shares were at all time highs as recently as two months.

Potential Upside

The upgrade was justified by “its higher quality loan portfolio and above average sensitivity to higher interest rates”, noted Morgan Stanley analyst Betsy Graseck. She’s also a fan of their lower loan-to-deposit ratio, along with the high percentage of non-interest bearing consumer deposits on their books. This implies that the lender should have a lower deposit beta (a measure of how responsive management's deposit repricing is to the change in market rates) as yields move higher.

While a bullish step in the right direction in terms of market sentiment, Bank of America shares still spent much of this week under pressure, and coming into Friday’s session were down about 7% on the week. Considering how red equity markets were yesterday however, with the benchmark S&P 500 index falling more than 1.5%, it’s fair to say the weakness is market driven rather than specific to the company. 

With the company’s Q1 earnings due out at the end of April, this week’s softness could end up being a gift of an entry point. Earlier this month, Baird analyst David George upgraded Bank of America to Neutral from Underperform, on the basis that recent weakness has helped improve the overall risk-reward profile. Shares haven’t really kicked on since so that projected upside is still there to be had. George wrote at the time that “overall, Q1 2022 bank trends look mixed. Preprovision net revenue outlook remains challenging near term but expectations are being reset. Average rates are higher from Q4 2021, credit quality stays healthy, and core loan growth moderated.”

Getting Involved

While it has to be noted that some fee category trends, such as trading, investment banking, and mortgage “look soft”, all things considered Bank of America is in a healthy position. Over the past six months, it’s really only Wells Fargo (NYSE: WFC) stock that has performed better out of the major financials, and the narrative there is one of a bounce back driven recovery rather than a fundamentals driven rally. 

For investors looking to gain exposure to a bank as we enter a tightening monetary cycle, where increasing rates will be a tailwind to banks’ bottom lines, one could do worse than pick Bank of America. This month’s recent low of $38 is acting as a solid support line and something to work a stop-loss around, while to the upside we have February’s $50 acting as the carrot on the stick. There are a lot of moving parts for banks like Bank of America to contend with right now, but they seem to be doing everything right and making the most of the monetary environment they find themselves in. Shares were trading up in Friday’s pre-market session so don’t be surprised if we see them fight tooth and nail to end the week on a positive note.